RBI Feb Policy 2025: MPC likely to cut repo rate by 25bps; policy stance and commentary eyed

The ongoing policy meeting commenced on Wednesday, February 5, and will conclude on Friday, February 7.

If done, this will be the first rate cut by the RBI after 11 consecutive decisions of maintaining the status quo on the repo rate.

The repo rate is the interest rate at which the central bank of any country (RBI, in the case of India) lends money to commercial banks in case of any shortfall of funds.

In its report issued on January 27, BofA Securities said, "With tariffs imposition from the US delayed, market sentiment is stabilising, and policy gaze is coming back towards domestic macro conditions. Growth and inflation data both point towards the need to ease monetary conditions. As such, we expect the RBI to cut the repo rate by 25 bps to 6.25% in the February MPC, potentially in a unanimous decision, and take steps to inject durable liquidity by considering another reduction in CRR of 50bp, or substantial bond purchases through open market operations."

This can help prevent spikes in short-end rates amid ongoing intervention in the foreign exchange market. The global investment banking and brokerage firm added that given its growth and inflation projections, it expects the RBI to prioritise growth as supply shocks fade.

"We maintain that the RBI could cut rates by 100 bps in the cycle, given a durable alignment of headline CPI close to 4% through 2025. This will bring the repo rate to 5.50% by end-2025, which we identify as being close to the neutral rate," the report added.

In its last policy meeting (December 2024), the RBI raised the inflation projection for the current fiscal year (FY24-25) to 4.8% from 4.5%, with the previous Governor Shaktikanta Das saying that lingering food price pressures are likely to keep headline inflation elevated in the December quarter.

Consumer price index (CPI)-based inflation increased sharply in September and October 2024, led by an unanticipated increase in food prices.

Core inflation, though at subdued levels, also registered a pick-up in October.

The fuel group remained in deflation for the 14th consecutive month in October. "In the near term, despite some softening, lingering food price pressures are likely to keep headline inflation elevated in Q3," Das said while unveiling the December 2024 monetary policy.

However, retail inflation moderated to 5.22% in December 2024, continuing its downward trend from 5.48% in November and 6.21% in October, according to government data.

As regards economic growth, the RBI significantly lowered the growth projection for the current fiscal year to 6.6% from 7.2% earlier and hiked the inflation forecast to 4.8% given the slowdown in economic activity as well as stubborn food prices.

India's GDP growth fell to a seven-quarter low of 5.4% in the July-September period of the current financial year 2024-25 as against RBI's projection of 7%.

Meanwhile, the first advance estimates published by the National Statistics Office have projected India's real and nominal GDP growth rates at 6.4% and 9.7%, respectively, in FY 2024-25.

Inflationary pressures have moderated in FY 2024-25, with average retail inflation easing to 4.9% (April-December) compared to 5.4% in 2023-24, notes the Macro-Economic Framework Statement.

Mandar Pitale—Head Treasury, SBM Bank India—notes that while MPC is expected to take cognizance of the recent bouts of rupee depreciation and the resultant risk of imported inflation in the medium term, the comfort on the near-term trajectory of inflation and the need for giving further push to growth supportive measures announced in the Budget 2025-26 is expected to weigh on the decision-making on rate action.

"The upcoming RBI February Monetary Policy review is coming against the backdrop of the government delivering a growth-supportive Budget with fiscal prudence. Conservative fiscal projections are instrumental in providing the necessary space for monetary easing. At the same time, the fiscal impulses provided in the Budget are growth-supportive in the medium term and thus will provide comfort to MPC in focusing on 'inflation-centric' policy measures," Pitale added.

Taking all these factors into consideration, Pitale said it would be prudent to start the rate-easing cycle in the forthcoming Feb MPC meeting with a 25 bps cut, retaining a neutral stance with a commitment to maintaining adequate durable systemic liquidity necessary for credit pick-up.